1031 Exchange Do's & Don'ts

DO ADVANCE PLANNING for the 1031 exchange. Speak in depth with your accountant, attorney, broker, lender and Qualified Intermediary. Only a CPA/Tax Attorney familiar with 1031 AND your prior several years tax returns can make sure you maximize the benefits.

DO assign your interest as Seller to a Qualified Intermediary (with whom you have also executed an Exchange Agreement.) prior to the close of the escrow pertaining to the property you are selling.

DO NOT miss your identification and exchange deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange. Reputable Intermediaries will not act on back-dated or late identifications. These dates are completely inflexible, even in the event of holidays, death and/or illness, or uncooperative sellers.

DO NOT over-finance the replacement property. The IRS does not consider funds remaining due to excess financing to be loan funds. You may not receive them without disadvantageous tax consequences.

DO keep in mind these basic rules to qualify for complete tax deferral:

DO purchase replacement property to be held for investment or for use in a trade or business of EQUAL OR GREATER VALUE.

DO use all proceeds from the relinquished property for purchasing the replacement property.

DO acquire title to the replacement property as the same entity that held title to the relinquished property.

DO NOT use exchange funds to pay loan fees.

DO REMEMBER that any credit to you on a closing statement is taxable, and reduces the amount of exchange funds that will be used to purchase the replacement property.

DO make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property. (Exception: A reduction in debt can be offset with additional cash, however, a reduction in equity cannot be offset by increasing debt.